Sunrise LNG Chapter 1. Dreams and Expectations

A Report by La’o Hamutuk
Timor-Leste Institute for Reconstruction Monitoring and Analysis

Contents of this file

Timor-Leste’s people have high expectations that oil and gas revenues will improve their lives and that the processing of petroleum will provide them with employment opportunities, attract local economic development and extract investment. In informal and formal discussions with communities, people expressed their hopes that petroleum revenues should be used for national development: improving agriculture, improving the health system, improving the quality of education, and improving the infrastructure so their children can go to school, receive adequate health care, have access to media and have better opportunities than they themselves had.

Timor-Leste’s first Constitutional Government underlined these expectations and promised to achieve this vision within the National Development Plan. [72] (Numbers in [square brackets] refer to the alphabetical list of references and sources in Appendix 8.) By the year 2020, according to this plan, Timor-Leste will be a prosperous society with adequate food, shelter, clothing etc. Our people will be literate, educated and have many skills. We will have good access to health care and an improved standard of living. Our public institutions will be transparent, operating under the rule of law. We will use our natural resources sustainably, with the income fairly distributed, and everyone will be able to participate in economic, social and political development.

During 2007, the people of Timor-Leste elected a new President and Parliament. The new Government, like the previous ones, is working to bring the Sunrise gas pipeline to Timor-Leste. They see this as an integral part of their campaign to develop Timor-Leste’s economy with foreign investment and to optimize the benefits for Timor-Leste’s people from our oil and gas resources. It is too soon to know all the details of this effort, let alone how successful it will be, but the tantalizing vision of a pipeline which will replace poverty with prosperity is shared by people and communities throughout Timor-Leste.

Box 1. Dreams and fantasies

“A pipeline to Timor from the Sunrise field with a Liquefied Natural Gas (LNG) export industry built on the north side of the island would generate huge additional economic benefits as a result of fixed direct investment. The quantification of these downstream benefits has been studied in detail by the Northern Territory government. Timor-Leste must strive to achieve these downstream benefits for her people, following the example set by the Northern Territory government. A Northern Territory government spokesman has said that if all Timor Sea gas came ashore to Darwin it would create directly and indirectly 12,000 jobs for Australians.”

Geoffrey A. McKee, petroleum analyst, March 28, 2005 [54]

“The AMP Government is ready to bring the pipeline from Greater Sunrise to Timor-Leste … because thousands of Timorese youth are unemployed … and Timor-Leste needs it to create job opportunities for other sectors to help develop Timor-Leste.”

Timor-Leste Prime Minister Xanana Gusmão, 17 September 2007 [98]

“There is not one person in Timor-Leste who doesn’t want the pipeline to come here …, and this new government, particularly my department, will work hard to secure the pipeline to Timor-Leste.”

RDTL Secretary of State for Natural Resources Alfredo Pires, 20 September 2007 [67]

“A pipeline and LNG to Timor-Leste will create 40,000 job opportunities for Timorese workers.”

RDTL Minister of Economy and Development João Goncalves, 1 October 2007 [100]

“The pipeline to Timor-Leste will create 10,000 job opportunities for Timorese.”

RDTL Secretary of State for Natural Resources Alfredo Pires, 15 October 2007

“There is no doubt that with the establishment of a LNG plant on Timor-Leste soil, this will automatically drive an extraordinary business boom into the East Timor economy. In context of macro-economic performance, the LNG plant will tackle and address the massive unemployment issue by creating directly manner approximately 20,000 jobs throughout different stages of construction of the plant, - indirectly, thousands of other associated jobs … needed to meet the expected mass demands at the LNG plant.”

-- Vicente Mau Bocy, 22 October 2007 [52]

Thoughts from across the Timor Sea

“Sunrise gas onshore will create thousands of extra jobs for Australians, and will increase GDP by A$15 billion.”

Northern Territory Chief Minister Clare Martin, 22 July 2002 [59]

“The [Northern] Territory Government is committed to bringing gas onshore from the Sunrise project, and will continue to work with the project proponents to develop a viable customer base for Sunrise gas onshore. This is the best way to maximize employment and local business opportunities.”

Dr. Chris Burns, Northern Territories’ Minister for Environment and Heritage, 28 March 2003 [90]

“The next major hurdle for the Greater Sunrise is East Timor’s insistence that any LNG plant supplied by Greater Sunrise gas be built within its borders. Woodside has said consistently that while transporting gas by pipeline from the reservoirs to East Timor is technically feasible, it is commercially unattractive.”

Nigel Wilson, The Australian Business, 12 February 2007 [120]

Darwin will not be in the running to process gas from the Greater Sunrise field until East Timor makes its own proposal for an onshore LNG plant. Mr. Macfarlane says the gas field’s proponents have promised to give East Timor a fair hearing. “Once they are satisfied with the outcome of those discussions as to where the gas will be processed, then I think you’ll see that project proceed.”

Australian Federal Resources Minister Ian Macfarlane, 30 May 2007 [1]

People hope that the revenue from oil will make it possible to turn these dreams into reality. They hope that foreign oil companies, invited by the Government to extract Timor-Leste’s oil and gas, will provide employment for local people, buy local agricultural and other products, rent their land and houses, and use hotels and restaurants owned and managed by the local community. Many people hope to share in the process of this development – selling their labor, goods and services. We don’t want to be like other countries, where oil funds the government or a few corrupt individuals, but the people get almost nothing.

Everybody in Timor-Leste wants our natural resources to give us the means to improve people’s health and reduce poverty. Our Government and other executive institutions have the responsibility to utilize these resources to achieve these dreams. One mechanism for doing this is the Petroleum Fund, which means to manage the revenue to benefit both current and future generations. Another process, perhaps more important in planning for two generations from now, when all Timor-Leste’s oil and gas will have been sold, is to use petroleum extraction and processing to develop the businesses, skills, education and experience necessary for strong, multi-sectoral, sustainable development. According to Secretary of State Alfredo Pires, “Oil is a motor for development of Timor-Leste … with oil revenues we will improve the non-oil sector such as tourism and other industries … so that by the time the oil resources are exhausted, Timor-Leste’s economic development is stable.” [67]

Realities

If we look around the world, petroleum development is often not a blessing, but a curse. [44] The global record shows that many countries rich in petroleum wealth score low in the UNDP Human Development Index, have high poverty levels, authoritarian systems, environmental degradation, militarism, human rights violations and corruption. Although oil can bring money, it also brings problems. In countries like Timor-Leste, where our economy and government are dependent on petroleum income (the majority of our national economy and more than 90% government revenues come from oil and gas), these dangers are even harder to avoid. It is critical to manage both the money and the industry well, and good models are hard to find.

Timor-Leste’s leaders have often stated their commitment to learn from the experiences of other countries to avoid the “resource curse.” However, this commitment needs to be more than only a political statement, but should be enshrined in laws and regulations and implemented with strong public institutions.

So far, the Government appears to have succeeded in petroleum development, but this is very narrow and based on only six years of Timor-Leste’s independence. Achievements so far don’t guarantee a prosperous and successful future, although they have begun to establish some basic legal foundations for Timor-Leste.

Greater Sunrise

The oil and gas resources in the Timor Sea have been disputed for more than three decades, since the Portuguese colonial period. Many actors have played roles in the Timor Sea process, such as international oil companies and foreign countries. Appendix 1 contains a description of Timor-Leste’s petroleum resources, and a detailed chronology of relevant events is in Appendix 2.

Greater Sunrise, which includes the Sunrise and Troubadour fields, was discovered in 1974. It is the largest field in the area claimed by both Australia and Timor-Leste, estimated to contain 300 million barrels of light oil (condensate and LPG) and 8.3 trillion cubic feet (tcf) of natural gas (see Table 14 in Appendix 3). Approximately one-fifth of Greater Sunrise lies within the Joint Petroleum Development Area established by the 2002 Timor Sea Treaty and administered by the Timor-Leste/Australia Timor Sea Designated Authority (TSDA), while the remainder lies in territory claimed by both countries and occupied by Australia, although it is all closer to Timor-Leste.

Woodside Petroleum has been exploring the Greater Sunrise field since before Indonesia invaded Timor-Leste in 1975. The terms of their contracts with Australia and the TSDA were negotiated with Australia and Indonesia in the mid-1990s, without Timor-Leste involvement. Under Annex F of the 2002 Timor Sea Treaty, Timor-Leste agreed to continue those terms, and the CMATS and IUA treaties ratified in 2006 provide the legal and fiscal certainty that Woodside and its partners require to proceed with development. Although Woodside is the operator of Greater Sunrise, it owns only 33.44% of the unitized project, with other shares held by ConocoPhillips (30%), Shell (25.56%) and Osaka Gas (10%).

According to the 2002 Timor Sea Treaty, the 2003 International Unitization Agreement, and the 2006 Treaty on Certain Maritime Arrangements in the Timor Sea (CMATS), Timor-Leste and Australia will each receive 50% of upstream revenues from Greater Sunrise, but where the gas will be piped for downstream processing (liquefaction) has not yet been decided.

Long-term petroleum prices are impossible to predict accurately, but we (see Fiscal Effects discussion in Chapter 4) estimate that the government of Timor-Leste could receive $10-16 billion in total from natural gas from the Greater Sunrise field over the next 40-50 years. Australia will receive as much or more. Although the Sunrise field was discovered decades ago, its development has been stalled for the last few years due to the boundary dispute (see Chronology, Appendix 2). Sunrise operator Woodside Petroleum suspended all work on the project in late 2004, although engineering studies resumed in 2007 following the ratification of the CMATS Treaty.

The pipeline debate

The natural gas in the Greater Sunrise field provides income only when it is delivered to customers who will pay for it. As it is stranded gas, it needs to be liquefied and shipped on tankers to buyers in other countries. This liquefaction process requires a major industrial facility, which could be built in Timor-Leste or Australia, and will be connected to the Greater Sunrise field through an undersea gas pipeline.

All of Timor-Leste’s governments, including Prime Ministers Mari Alkatiri, José Ramos-Horta and Xanana Gusmão, repeatedly stated their commitment to bring the pipeline to Timor-Leste if such a project would be good for the citizens of this country. As time goes on, our leaders promise larger and larger benefits from the project, and our people expect that the pipeline will greatly boost Timor-Leste’s economy and development, creating job opportunities for tens of thousands of Timor-Leste people. They hope that building an LNG plant and LNG tanker port here will enable Timor-Leste to do more than simply sell unprocessed oil and gas, but also build up our industrial capacity. Our leaders and our citizens see obtaining the pipeline and LNG plant as a vital component of our National Interest.

However, both the Australian Government and Woodside have long advocated that the pipeline should go to Australia, rather than to Timor-Leste for technical, financial and political reasons. To pressure Timor-Leste’s government to give up its maritime boundary rights, Woodside often claimed that a “market window” for Sunrise LNG was about to close, and that if the project wasn’t developed quickly it might not happen at all. But more recently, it has become clear that LNG will be a “sellers market” for decades to come, and that the value and marketability of the gas will continue to increase over time.

Woodside’s proposed development plan will be based on their commercial interests, rather than moral issues. However, the leaders of Timor-Leste have stated their commitment to bring the pipeline onshore to Timor-Leste, and called on the company to respect Timor-Leste’s wishes.

If the project goes ahead expeditiously, concept selection will be probably be in 2008, the development plan could be in approved in 2009 and gas production could begin in 2013. However, it would be better for Timor-Leste if the project started later, for reasons explained in Chapter 9.1.

Ongoing public discussions seem to focus the commercial interests of the international oil companies, rather than Timor-Leste’s rights. Although the LNG Plant will benefit Timor-Leste’s economy, it also brings risks. Timor-Leste’s people should consider more than just getting jobs and economic gains from this huge project, but also hot to protect our land, healthy environment, and the right to participate in the development process. Even if the country as a whole benefits, local communities could lose.

The purpose of this report is to explore the benefits and costs, the risks and opportunities that a pipeline and LNG plant could bring to Timor-Leste, and to encourage every citizen to think hard about whether it will be good for our country, and what we have to do to ensure that Timor-Leste gains more from this project than we will lose. We do not attempt to predict what the development decision will be. Rather, we hypothesize that Australia, Timor-Leste and the companies agree to build a pipeline to Timor-Leste and an on-shore LNG plant on our south coast. If that were to happen, Timor-Leste’s people need to know the benefits and risks of such a project, and our government needs to take actions now to maximize the gains and minimize the dangers.